Articles | August 16, 2024

Unintended Effects of Benefit-Tier-Related Pension Reforms

By Jonathan P. Scarpa, FSA, MAAA, EA

In the wake of the global financial crisis of 2008 and 2009, many public pension plans adopted reforms intended to address rising pension costs and improve funded levels.

One common approach was to create less valuable, lower-cost benefit tiers for new hires. Often, these new benefit tiers included some combination of adjusting retirement ages, the period of compensation in which a benefit is determined and the benefit multiplier (the percent of salary replaced for each year of service).

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Cost savings were expected to be realized over the long term as members of the new benefit tier gradually phased into the active population. What may not have been as clear was the influence the changes would have on employee behavior and morale as well as the resulting broader impact.

Those unintended consequences are addressed in an article published in the Summer 2024 issue of PERSist, the newsletter of the National Conference on Public Employee Retirement Systems (NCPERS), which you can access from this page, with permission from NCPERS.

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The article covers:

  • Current backpedaling on reform
  • The multiple layers of impact from reform
  • Understanding the full picture
  • Finding the delicate balance between benefit levels and the cost of funding them

The most critical point to remember is the historical value public employees place on retirement benefits. Those benefits are an essential component of their working career.

The importance of defined benefit plans is not limited to employees. For employers, the plans and their individual provisions represent valuable attraction, retention and workforce-management tools. 

Have questions about the unintended consequences of benefit-tier-related pension reforms?

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.